The Banks vs Fintech: Will the Confrontation Continue?

29 October, 2015

Igor Dubovoy

The astounding rise of the world’s fintech market has generated a barrage of comments regarding the effect of fintech on the banking industry. The general opinion is that the constant progress of fintech will one day spell the end of the banking system as we know it. Personally, I have not paid much attention to such comments when they appear on Twitter and Facebook. On the other hand, many influential consulting firms have recently joined in and their opinion is worth listening to.

Granted, banking technology has lagged behind the rest of the financial market and well behind the mounting needs of bank clients. During our years in the field, our company has devoted considerable time and effort to making this clear to bank executives. For the most part, we have been successful at convincing them that they need to change the interfaces of their products to ones that are easier to use. And we have never found it difficult to prove to bankers the value of offering mobile banking to their customers.

Still, I cannot say without a doubt, nor can anyone else, that the surfeit of fintech concerns will squeeze traditional banks out of the market. Even though fintech companies have won a piece of the pie traditionally reserved for banks, their share represents a mere fraction of the monolithic banking system. In my view, the leading fintech startups have been chiefly successful in the transaction aspect of the banking industry; they have had almost negligible effect on such traditional banking operations as deposits and loans.

There are a number of reasons for this. Sooner or later, fintech operations are themselves faced with the restraints of legislation and banking regulation.

If matters related to the transactional elements of banking are truly decided on the basis of legislation, then all operations connected with clients’ deposits and accounts, and the disposition of such funds, should require a company to have a full-fledged bank licence. Such an understanding is one of the world’s recognised business norms.

At the same time, if we make the sweeping assumption that all such norms are carved in stone, we complicate banking procedures even further–from the initial identification of a customer to capital requirements. Though some of these unnecessarily complicated procedures are intended to minimize risk, it is unfortunate that they can also render bank services less convenient and more expensive.

In my opinion, we are not justified in laying all the blame at the feet of an inertia-bound banking community. We should bear in mind that quite a number of banks are glad to provide their customers with new technologies. It often happens, however, that they are prohibited from offering certain innovations due to bank regulations from above and over which they have no control.

Over the past several years we have concentrated on creating innovative approaches to online banking and mobile banking, so we consider ourselves qualified to address the question of innovative measures that might not meet banking norms.

Here’s yet another thought to ponder. I have read countless articles and visited scores of presentations where the photo of the author or the presenter is proclaimed to depict the banker of the future. But I can’t help wondering if I would trust that person with my savings. Could I, in fact, wholeheartedly trust the innovative apps of somebody who has had little professional experience in risk management?

Now let’s turn our attention to the situation from a more realistic angle. I sincerely believe that fintech will never be victorious in a match with traditional banking. And this has little to do with whether fintech companies are more competent or less competent than banks.

Only time will tell, of course. But I feel sure that future developments will lead to a curious symbiosis between banks and the companies that provide advances in financial technology.

On the other hand, if we want to predict that one or the other will emerge as the undisputed victor, so to speak, it will most likely be the banks, or certainly the bank regulators.

It seems doubtful to me that some committee of regulators will move to simplify, in any serious way, the regulatory demands made on the banking industry. This is largely because both the security of depositors’ assets and the overall stability of the world’s financial system depend on such regulation.

Using this simple logic, I believe we can envisage a couple of possibilities. One is that the fintech startups will have to change their business models to make them conform more closely to banking regulations, or at least strive to make them less confrontational. The other is that they will be forced into a symbiotic relationship with the banks. In the latter instance, both entities could do much to enhance the quality of their work in a great number of mutual projects. There may even be a third possible scenario in which a bank or consortium of banks take over some of the more dynamic fintech operations. Whatever the eventual outcome, the banks themselves will have to become more fintech savvy and, sooner or later, devote a meaningful part of their activities to the technological aspects of banking.